Thursday, February 07, 2008

The Crime of Selling Abandoned Copies

The Crime of Selling Abandoned Copies

If you came across a trash can filled with lawfully made compact discs and DVDs that the copyright owner had authorized to be put in that trash can and then thrown away because it didn’t want to pay the postage to have them returned, do you think you could be criminally prosecuted for selling those copies, and would you think that the copyright owners would be entitled to restitution under the Mandatory Victims Restitution Act? If you answered no to these questions, you would be wrong according to the Eighth Circuit.

The facts are pretty much these (at least as recited in the opinion): defendant was an employee for the U.S. Postal Service. BMG Columbia House is a mail order operation selling CDs and DVDs by mail. Many of these discs are undeliverable. Rather than pay the postage to have them returned to it, BMG Columbia House instructed the Postal Service to throw them away. The Postal Service did throw them away. Defendant then retrieved them from the trash and sold them to area stores, netting $78,818. A surveillance camera showed defendant retrieving the items and he was arrested; he was originally charged with felony mail theft, but then pleaded guilty to misdemeanor copyright infringement. The trial court sentenced defendant to two years probation and ordered him to pay $78,818 to BMG in restitution. Chalupnik appealed .

The district court’s theory was “I do believe that there is in fact a lost opportunity to ... BMG, that the people that bought those CD's ... would likely have bought new CD's, and that that represents a real and substantial loss to ... BMG in the amount of $78,818.” The government argued that “BMG is a victim because it owns the discs, sells them with permission of the copyright owners, and controls the disposition of undeliverable discs; that each time Chalupnik sold an undeliverable disc, the artist lost a royalty and BMG lost a potential sale; and that the amount of those losses is conservatively estimated by Chalupnik's gross revenues, $78,818.

The court of appeals agreed that BMG Columbia House was a victim within the meaning of the MVRA, but held that no loss had been established:

[I]t is clear that the government proved no actual loss to BMG. The PSR recommended, and the district court agreed, that BMG suffered a “lost opportunity” when Chalupnik stole BMG's undeliverable discs and sold them to competing retail sellers. The … lost opportunity rationale is valid in the sense that all authorized retailers of the copyrighted discs-Wal-Mart, Best Buy, iTunes, BMG, and countless others-as well as the copyright owners, suffered collective financial injury when infringer Chalupnik sold purloined discs at cut-rate prices to used record stores. But it would be a windfall to award BMG this entire collective “injury to the market.” And the large number of victims and the difficulty of determining each victim's actual loss make the collective injury inappropriate for MVRA restitution.

The government argues that the price at which Chalupnik sold the stolen discs is a reasonable, indeed conservative estimate of BMG's lost sales. One problem with this argument is that, for goods held by a merchant for sale, lost profits rather than lost sales revenues are the proper measure of “actual loss.” A more fundamental problem is that proof of lost sales, like proof of lost profits, may not be “based entirely upon speculation.” … Here, the letter from BMG's senior counsel asserted that Chalupnik sold discs to used record stores whose customers “theoretically could have purchased them [from BMG], resulting in lost sales to BMG.” But BMG's practice of destroying rather than restocking undeliverable discs meant that the discs Chalupnik stole would not have been sold by BMG, and there is no evidence that Chalupnik's sales diverted specific business from BMG. From this standpoint, BMG's position resembles that of the purported MVRA victims whose restitution awards were reversed because the government failed to prove actual loss through lost sales in Hudson, 483 F.3d at 710-11, where counterfeit Microsoft software was turned over to the government by the infringing defendant's customer before any payment to the infringer, and in United States v. Adams, 19 Fed.Appx. 33, 35 (4th Cir.2001) (unpublished), where pirated videocassettes were confiscated before the infringer could sell them.

Finally, the government argues that BMG should receive restitution on behalf of the unidentified copyright owners who would have been paid royalties had BMG sold the purloined discs. This argument is without merit because restitution to each victim is limited to “the full amount of each victim's losses.” 18 U.S.C. § 3664(f)(1)(A). The letter from BMG's senior counsel admitted that Chalupnik's criminal conduct “resulted in no royalty payments being made [by BMG] to the artists, record labels, music publishers, and movie studios,” so there was no proof of actual loss to BMG arising out of its unproven relationships with copyright owners.

Among the many things I find amazing in this whole debacle is the assumption that there could be copyright infringement. The copies had been thrown away at the direction of the BMG Columbia House (which may or may not have also been the copyright owner). I would think that means any ownership in the copies had been abandoned and that therefore anyone was free to do with them what they wanted. If instead of the postal worker having taken them out of the trash, what if the trash dump owner had discovered them and sold them?

36 comments:

It doesn't sound like there was any copying, so presumably the right infringed was the right of distribution. But does BMG have the right to control distribution of something it threw away? I understand there was no sale, but isn't the right still in some sense exhausted?

I agree with your last paragraph 100%. I'm pretty sure if I discard something and you pick it up, you can do with it what you will. I don't exactly understand why this is different.

Kind of related to this, years ago I dated someone who worked in a store that sold Disney CDs. When the CDs had reached the end of their shelf life (as they like to create artificial scarcity for all their media) the stores were explicitly told to destroy the remaining stock. And they did, for fear of having Disney pull out of the store.

Now, if BMG was really concerned about this, they should not cheap out and assume the USPS is going to do the job for them. After all, the USPS has no incentive to do so. It's not like they're going to take their business elsewhere.

The thing that bothers me about this is it's the same arguments I've seen every time someone wants to put the kibosh on used CD sales. The difference being, this guy didn't actually buy the discs in the first place. But, I'm pretty sure selling promo discs is kosher, so I really don't get why this is any different.

Being someone who is selling of most of his own collection, I'd love to know how many discs this guy had to net over $78k. I think I've been averaging about .75 cents a disc myself.

This case could go beyond just a few discs. The post office has to unload a lot of mail that is undeliverable and nonreturnable including magazines, catalogs, books, and merchandise. Technically those things are supposed to be thrown away, but it would not be beyond imagination that those items make their way to new homes. What a waste to destroy or throw away otherwise useful things!

Agreed all around on infringement, but the court's discussion of damages appears to lay to waste the RIAA's and MPAA's claims, typically made in the context of P2P downloading, that each download equates to a lost sale.

On one level, the district court's use of the price the defendant got for the CDs (totally 78K) makes some sense. Presumably, BMG could have gotten the CDs back, then turned around and sold these copies to these same stores and made the same amount that the defendant made.

Of course, BMG didn't do this. They preferred to throw the discs away (which, as other have pointed out, is incredibly wasteful, and hardly something that the courts ought to be encouraging by upholding criminal prosecutions of those who salvage and resell abandoned goods). It's difficult to square the underlying finding of infringement here with other cases discussing first sale and film salvage, such as (IIRC) Wise and Atherton. I'm assuming that (a) the district court didn't really address infringement in this case, since it was a guilty plea (to a misdemeanor, which the defendant presumably agreed to in order to avoid a more serious theft of mail charge), and (b) if a "first sale" defense was raised, the district court might have rejected it because it found (for some reason) the defendant hadn't acquired them legally. (Pehaps there's some law against taking mail from a post office, even if it's been slated for destruction or disposal.)

Regarding the restitution amount, as far as BMG were concerned, it was cheaper to ditch the CDs than to pay to have them mailed back to them. That would seem to cap their actual "loss" amount at the (small) cost of mailing the discs back to BMG -- i.e. BMG valued the discs at less than that cost.

And Paul -- dubious as some of the "lost sales" arguments are in the P2P context, here the defendant was actually making sales. I.e. someone was actually buying the copies. So the "lost sales" argument is much stronger than in the P2P context, where other users are downloading copies for free. That's one reason P2P plaintiffs typically seek statutory, rather than "actual" damages, which are tough to prove, if not impossible.)

Doesn't surprise me in the slightest that BMG would do that -- isn't that what businesses have to do? You know, kinda like a slippery-slope argument (they have to pursue these silly cases so that larger, more important ones will be judged effectively).

How odd. This reminds me very much of that case several years ago of a guy who was salvaging discontinued sewing patterns that had been thrown away by fabric stores and then was selling them online.

As I recall, he won, which seems like the correct result. I can't see what this very similar fact pattern would come out differently. The only distinction I can think of is that the guy in this current case apparently was a postal employee while the guy with the sewing patterns had no connection to the fabric stores. But that shouldn't matter, thrown away is thrown away.

I agree that there is no infringement here, in light of the first sale doctrine.

As I understand it, Columbia House sells CDs from many labels, but is licensed to manufacture the CDs (see the label where the bar code should be on these record club CDs). This does raise an interesting question of when title passes on these shipments. So if the defendant had stolen the CDs from the mail, perhaps this makes sense. But not after Columbia House authorizes the Postal Service to trash them.

But this sheds new light on the recent statement by EMI's Guy Hands that it spends $50m on destruction of CDs each year. What an absurd waste.

There's no question that the copies in question were "lawfully made," and so section 109 governs. The only question is whether the defendant became a legal "owner" of the copies -- if he did, there's no infringement; if not, then there's a facial violation of 106(3).

Since BMG authorized the post office to simply throw the disks away (as opposed to directing them to be held for periodic pickup by a shredding company), the disks certainly appear to have been abandoned, which would have made the defendant the owner after he took possession of them.

The only argument I can see to the contrary would be that the trash was the property of the USPS, and the defendant did not have the legal right to root through it or take any of it -- in which case he could not have become a legal "owner" of the copies as required by 109.

Anyone have any idea of at what point does *government* trash become abandoned property?

I think that the guilty plea point is a big deal in assessing its relevance. The notion that a criminal defense lawyer in podunk who probably usually deals with far less estoric cases might be willing to avoid the risk of a felony rap (or simply the cost and expense involved in fighting a felony rap) for a plea to a misdemeanor that his client probably didn't legally commit, is notable and sensible. In the same vein in Denver there are routinely pleas to trespassing on agricultural property (none of which exists in the jurisdiction) and damaged headlight from underlying true offenses nothing like the pleaded crime.

This case, as a result, didn't set precedent on the legality of the conduct itself, and did set precedent on the appropriate punishment in a broad class of cases where there is infringement favorable to the infringer.

The direct link to the case is http://www.ca8.uscourts.gov/opndir/08/02/071355P.pdf

Reading it produces a couple of insights. At sentencing he got two years of probation and no fine, plus the restitution. Now that the restitution is vacated, the issue of a fine can be reconsidered. But, if the fine is less than the money he made reselling the disks, he gets to keep the profits. The fine for misdemeanor copyright infringement probably doesn't include a multiple of loss provision the way most theft fine statutes do -- usually that is a restitution matter.

Also, the fact that the defendant was a postal service employee, a janitor, may be relevant. The trial judge asked if the janitor was a bailee on behalf of the post office for BMG, as it arguably wasn't abandoned until it was in the trash and available for all. I'm incline to think that this argument is weak.

Another way to look at this is as a government employee usurping an opportunity created by the employer (the USPS) to receive benefit which belonged, if to anyone to the employer, for himself. There is a general notion out there that public employees shouldn't receive private benefit other than that authorized by law for doing their jobs. In the same way, we would question a sheriff's deputy who made it his business to appropriate for himself unclaimed property left in evidence rooms (and hence abandoned) or left on the street a few days after evictions in remote locations.

A mere dumpster diver or landfill comany might be situated differently than a postal employee in this regard.

Even if this way BMG property and not abandoned under a bailment theory, one might also instead of having put a zero dollar loss on the restitution award (looking at it not as IP but simply as property taken), have stated that the FMV of the property taken was shown to be under the cost of return postage by the acts of BMG.

109 states: the owner of a particular copy or phonorecord lawfully made under this title, or any person authorized by such owner, is entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy or phonorecord.

I know that the question of ownership has been litigated in the 602 (importation) context (and there is one case that, I think, looked to the UCC for guidance on this but I don't remember the caption), but it seems to me that "ownership" of the chattel would be a question of state law. And it just seems like it shouldn't take the 8th Circuit a whole lot of time to figure out that it simply isn't illegal to find stuff in the trash and sell it. See, e.g., ebay. And if it's a question of federal law, that ain't exactly Marbury v Madison either.

Thank you Rumpole; since the employee was not (eventually) charged with violating any Postal laws, that part seems beside the point. Since the employee angle is beside the point, I would think the analysis would be the same if it was a stranger who happened upon the dumpster, and in the case of a stranger, I believe we all agree that is a very odd result.

This is particularly interesting because it involves Columbia House and presumably their "Record of the Month Club". You could get an LP (once upon a time), a CD and now a DVD for a buck each month. The prices on the other product you purchased in that manner were unbelievably low.

What most people didn't know was that this product was sold as "promotional material" and as such, it was charged to the artist as promotions via their contractual arrangements with the label (distributor).

This may not be going on presently, but it has in the past. Having worked in the retail end of the music business I see how promotional material is dealt with. I never got the promotional copies in a timely fashion, nor did I necessarily get what we were selling.

If it was not appropriate for in store play we could not add it to our stock. If we tried to return it to the distributor (who claim they still owned it) they would refuse to take it back. They didn't care how you used it, just so long as you didn't sell it.

The level of hypocrisy never ceases to astound me. More and more I am coming to the conclusion that copyright law has reached the end of its useful life. I speak now as a musician and one who may be releasing recordings. I am no longer sure that copyright law benefits me or any other artist at all. In the end, I will make my living from personal appearances or from teaching.

These days, copyright law seems to be used as sledge hammer to either scare or extort money from people or other companies. This is a sorry state to find ourselves in.

katatak's point regarding "promotional materials" is a good one. If these discs were classified by the labels as "promotional" materials (FVL also mentioned the lack of a standard UPC bar code on the typical "record club" CD) then *even if* there were infringement, and *even if* the court were to allow restitution to BMG "on behalf of" the performers/artists ont he CDs, it still wouldn't clear whether actual sales of these particular discs would have earned the musicians any royalities (and indeed, if they were coutned as promo materials, the cost of the CDs may have been counted against the musician's royalties by the label). Of course, there's still the argument that these copies, when sold through used CD shops, displaced sales of other "regular" CDs.

I don't really get the harm from displacing sales issue; why not destroy the CDs or pay the postage to have them sent back if a company is so worried about competition with stores? And, it is not at all clear to me that there is such competition: after all, the original CDs were sent to people who had subscribed, and they may not be the same folks trolling stores for promos. None of this seems sufficient to me to turn upside down the first sale doctrine.

I don't think the "displaced saleS" argument is a good one, necessarily. It just seems to be one the plaintiff and its ilk frequently make, and that courts often give credence to. But it seems awfully speculative. Of course used CD sales may cut into the sales of new CDs, but given the lower prices charged for used ones, the effect may be small (and the ability to resell old CDs props up the price of new ones, too). It's also a separate issue from first sale rights -- if the defendant's conduct is noninfringing because of first sale, then it doesn't matter whether his sales displaced the plaintiff's.

I do have some small degree of sympathy for the plaintiff here. Since the value of a CD is in the music contained in it -- and not in the physical object itself -- if the CD is undeliverable, it also makes little sense to spend a lot of money to ship it back to the sender. It's cheaper for them to print a new one. Which sort of illustrates the odd business model these folks are in. And I think we're in agreement that the copyright laws (and especially the criminal ones) ought not be rearranged and upended to suit the specific needs of one industry and its outdated business model.

If they don't want people to return the CDs and don't want to flood the market with the ones that are unused, they could require a one time only automated answer activation code (it could be some simple sequence of track requests) that expires a few weeks after it is mailed to use the CD.

The activation code call logs, coupled with caller ID, would also give them a really wonderful market research database, and that data would probably be worth more than the current rather lackluster business.

I'm a little baffled by the outrage, even though I'm usually pro-copyfight as the next internet geek. While it's a little fuzzy whether this is theft (thus the lesser charge?), you don't have a right to sell someone else's creation that you didn't pay for in the first place. This isn't an example of a legitimate secondary market.

If a grocery store throws out a bunch of expired food, it's one thing to dumpster dive for yourself, but you can't set up a stand on the sidewalk in front of the store and sell the food to people who would otherwise go into the store.

There's an (apparently legal) expectation that what's thrown out is going to the landfill. If I (unwisely) throw out a credit card statement, I'm not giving someone permission to charge purchases to my account. Doing so is still fraud. What you steal from the garbage only becomes yours if the person disposing of it isn't going to mind.

I think that BMG is attempting to exert undue control over the secondary market. As soon as they told the USPS to trash the merchandise, they gave up the property. If they wanted the merchandise to be destroyed, they should have both stipulated and paid for the destruction.

The PSR recommended, and the district court agreed, that BMG suffered a “lost opportunity” when Chalupnik stole BMG's undeliverable discs and sold them to competing retail sellers.[emphasis added]

How did he steal anything? I thought it was fairly well established that dumpster diving was not theft, therefore the discs were his property. If he had just taken them home and put them on a shelf would he have been guilty of anything?

Oh, if only some law firm would do the unthinkable and take action against other law firms and judges to bring true justice to our great nation!

Copyright infringement could possibly be justified if the defendant represented himself as an agent of BMG. Did he repackage the discs, or did he sell them with BMG labels? No. He sold them as used media.

If the court determined that the buyer could reasonably beleive that he was actually a BMG reseller, than I can see charges sticking for fraud, and infringement against the BMG's copyrighted name. But if the plaintiff didn't represent himself aas an agent of BMG to the used record stores, then the answer again, is no.

But if the plaintiffs for copyright infringement are the record labels, for example, then BMG could be reasonably brought up on charges as well, having distributed copyrighted material and instructing for it to be disposed of carelessly. Oh, promotional copies don't represent lost revenue for the artists? What about the recording labels?

If I print this article and threads, then throw them away, but someone else finds the paper and copies it to another website, has copyright infringement occured? If so, by whom?

I work in Military Intelligence. I know as well as the next guy, that we don't want to allow a dumpster diver to exploit that which we find useless, but someone else could find useful.

It seems to me that the real shame here is that BMG Columbia House was ashamed that their neglegence could have led to the RIAA or MPAA taking action against them, and in their panic, they set up an illegal investigation and potentially committed entrapment.

Does the janitor still work for the USPS? Should he be restituted for slander?

He really didn't do anything unAmerican. He capitalized. As such, he is treated like a criminal?

It's not about being arrested and charged with copyright infringement. This is a lesser charge that Chalupnik plead to, presumably in a deal with the DA's office. I'm sure they were just trying to make him eat it instead of pleading to the felony charges. You said it yourself - "he was originally charged with felony mail theft, but then pleaded guilty to misdemeanor copyright infringement." So if it was a choice between felony/jail or misdemeanor/fine, what would you make a deal for? This seems like a deal, that Chalupnik now wants to renege on because it's a bogus charge and he can get it overturned. I would think the DA could rearrest Chalupnik on the felony mail theft charges.

How can he be charged with mail theft, when the items had been thrown away? In the US, the courts have long ruled that once something has been thrown in the trash, it becomes fair game for anyone who wants to take it.

As said, the case is not one of Copyright Infringement, as that was a guilty plea, apparently as part of a plea bargain.

Instead, the case is really one of Mail Theft, which is a legitimate case, which was dropped because the alternate plea benefited the plaintiff better.

If the final charge had been Mail Theft, then the final sentence would have been jail time, and POSSIBLY restitution, if a reasonable case for damages could be made by the entities from whom mail was stolen (In this case the label). It would actually be a whole separate case, in which Copyright Infringement charges would come up.

In this case, I think the actual result to a properly executed Copyright Infringement charge would be guilty as abandoned mail is not "abandoned" until it ends up in a landfill. The post offices lock up their dumpsters and the whole 9 yards. Any dumpster diving in Post Office dumpsters IS a felony, whether for yourself or someone else.

There seems to be a lot of going back and forth about ownership and copyright infringement here, but neither is really relevant to this case.

The DA wanted to avoid the cost of a long trial, and the defendant knew he was guilty. An alternative plea was offered and the defendant (and/or lawyer) dove on it. In the end, this lesser plea also provided a simple path to restitution by the label until the defendant appealed that on the grounds that his sales were of abandoned discs that the company had refused to sale.

A guilty plea has to have a factual basis, meaning the facts admitted to by the defendant have to satisfy the elements of the crime.

I think the situation is this - someone at BMG got their panties in a bunch over this and called the Post Office. Because none of the big players involved could stomach the embarassment, they took it out on the dumpster diver. When they collectively realized the charge of mail theft was *ahem* garbage (because one cannot steal that which has been thrown away), they came up with this copyright notion.

If the AG's office was smart when they did the plea, they would have protected themselves from a bad appeal result and kept an out that lets them undo the whole plea and put the defendant on trial for the original charges. The defendant may find himself in some problems yet, but I gotta say, I'd take a case of dumpster diving in front of a jury any day. Heck, even the government can take your trash and sort through it once you put it out for collection - courts have shown no difficulty in finding that to be proper and calling it "abandoned property". This is no different.

Having spent many years doing criminal defense work, I know how this happened - everyone wanted it to go away, including the defendant, until the judge bought the party line from BMG and ordered the restitution - it wouldn't surprise me at all to learn that no one involved in the sentencing proceeding thought a judge would buy this "lost sale" argument.

Hi Curtis, I certainly defer to your experience; you may be right that there were other things going on, but I still don't see how the court of appeals could have ignored the obvious and fatal error of law regarding the first sale doctrine.

It's really simple. Clearly the upper bound on the value of the CD's to the record company is the postage it would have cost to send them back, because if they were worth more than that, the record company would have had them shipped back.The postage for sending them back should be determined by the USPS, and that should be the upper bound on any amount charged to the guy who sold the CD's.

"Clearly the upper bound on the value of the CD's to the record company is the postage it would have cost to send them back ..."

That upper bound was a *guess* on BMG's part. If it was an infringement, I'm not sure why BMG *shouldn't* be allowed to benefit from Chalupnik's clearly-established value, in the marketplace, of the "upper bound": Chalupnik grossed $78,818 from wholesaling "several thousand undeliverable CDs and DVDs".

What I can't quite figure is how Chalupnik *isn't* protected by first sale doctrine. The court missed or ignored that one, helping Chalupnik who may have been eager to plead anything that would get him away from felony criminal charges.

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